The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.
The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.
As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.
The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).
By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.
The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.
The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.
However, real GDP is only a little over 4.5 percent above its prior peak as of this writing in 2013, and the jobless rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.
How did we recover from the financial crisis of 2008?
Congress passed the Struggling Asset Relief Scheme (TARP) to empower the US Treasury to implement a major rescue program for troubled banks. The goal was to avoid a national and global economic meltdown. To end the recession, ARRA and the Economic Stimulus Plan were passed in 2009.
How long did it take the United States to recover from the 2008 financial crisis?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing credit, which helped to fuel the subsequent surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.
How did the US government respond to the financial crisis of 2008?
During times of national crises, Congress has responded by directing federal resources and programs to help struggling Americans. While it is critical to respond rapidly to crises, it is also critical to ensure that federal programs and public resources are used as intended.
The GAO’s involvement during times of crisis is examined in today’s WatchBlog piece, which focuses on the federal response to the Great Depression, the Great Recession, and the coronavirus outbreak.
When the stock market crashed in 1929, precipitating the lengthy period of economic decline known as the Great Depression, GAO was still a relatively young organization.
In reaction to the Great Depression, Congress passed President Franklin D. Roosevelt’s New Deal, which included $41.7 billion in funding for domestic initiatives such as unemployment compensation.
GAO’s workload grew as federal funds were poured into the 1930s’ recovery and relief efforts. GAO, which had around 1,700 employees at the time, quickly ran out of employees and needed to hire more to handle paperwork such as vouchers. Our staff had nearly tripled to 5,000 by 1939.
Our auditors began extending their involvement in overseeing federal programs at the same time. Fieldwork in Kentucky and numerous southern states began in the mid-1930s, and included examinations of government agriculture programs. This steady shift in goal from acting as federal accountants to serving as program and policy analysts would last until 2003, when the General Accounting Office was renamed the Government Accountability Office.
The Great Recession, which began in December 2007, was widely regarded as the country’s worst economic downturn since the Great Depression.
As a result, Congress passed the American Recovery and Reinvestment Act of 2009, which contained $800 billion in stimulus funding to help the economy recover.
GAO was given a number of tasks under the Recovery Act to help enhance accountability and openness in the use of those funds. For example, we conducted bimonthly assessments of how monies were spent by various states and municipalities. In addition, we conducted specialized research in areas such as small company loans, education, and trade adjustment aid.
Despite the fact that the Great Recession ended in 2009, we are still investigating its effects on the soundness of our financial system and related government support. For example, in response to the 2008 housing crisis, the Treasury Department established three housing programs utilizing TARP funds to assist struggling homeowners avoid foreclosure and keep their homes. TARP programs were assessed every 60 days during the recession and subsequent years, and we proposed steps to improve Treasury’s management and use of funds. This effort continues today, with annual audits of TARP financial statements and updates on active TARP projects. In December 2020, we released our most current report.
We’re also keeping an eye on the health of the nation’s housing finance system, which includes Fannie Mae and Freddie Mac, which buy mortgages from lenders and either hold them or bundle them into mortgage-backed securities that can be sold.
Fannie Mae and Freddie Mac were taken over by the federal government in 2008, and the role has remained unchanged for the past 13 years, keeping taxpayers on the line for any possible losses sustained by the two corporations. We wrote about the dangers of this prolonged conservatorship and the need to overhaul the home finance system in January 2019.
Congress approved $4.7 trillion in emergency funding for people, businesses, the health-care system, and state and municipal governments in response to the pandemic. We’ve been following the federal response by, among other things, providing reports on the pandemic’s and response efforts’ effects on federal programs and operations on a regular basis.
Vaccine development and distribution, small business lending, unemployment payments, economic relief checks, tax refund delays, K-12 and higher education’s response to COVID-19, housing protections, and other topics have all been covered in our work.
On July 19, we released our most recent report on the federal response, as well as our recommendations for how this effort might be improved further. In October, we will publish our next report. Visit our Coronavirus Oversight page often because we’ll keep you updated on the federal reaction to COIVD-19 as the situation unfolds.
GAO has played a key role in overseeing federal expenditures and programs during times of crisis, and we continue to do so in more normal times. We produce hundreds of reports each year and testify before dozens of congressional committees and subcommittees on problems that affect our country. We saved taxpayers $77.6 billion in government spending in fiscal year 2020. For every dollar Congress invests in us, we get $114!
When did the US recover from the 2008 financial crisis?
Millions of jobs were lost during the Great Recession, and high unemployment persisted for years after the official end of the recession in June 2009. One of the most terrifying aspects of the recession is how deep it will go, which is why Congress approved and President Obama signed the American Recovery and Reinvestment Act (ARRA) in January 2009. ARRA, sometimes known as “The Stimulus,” was a $800 billion package of tax cuts (approximately one-third) and spending programs (about two-thirds), with the principal impact stretched out over three years. Many economists thought that the stimulus was insufficient, while conservatives such as the Tea Party claimed that the emphasis should be budget reduction.
The number of jobs (“total non-farm payrolls,” which includes both private and government workers) peaked at 138.4 million in January 2008, then dropped to 129.7 million in February 2010, a drop of approximately 8.8 million jobs or 6.8%. It took until May 2014 for the number of jobs to return to where they were in January 2008. In comparison, the severe 1981-82 recession resulted in a 3.2 percent employment loss. It took until August 2015 for full-time employment to return to pre-crisis levels.
The unemployment rate (“U-3) increased from 4.7 percent before the recession in November 2008 to 10.0 percent in October 2009, before progressively dropping back to pre-recession levels by May 2016. One thing to consider is that before to the recession, the job count was artificially high and the unemployment rate was artificially low due to an unsustainable housing bubble, which had significantly expanded construction and other jobs. The unemployment rate was close to 6% in 2003, before to the huge increase of subprime lending in 2004-2006. The “U-6” measure of unemployment, which includes people who work part-time for economic reasons or are just weakly engaged to the labor force, went from 8.4% pre-crisis to 17.1% in October 2009. It took until May 2017 for it to return to pre-crisis levels.
Bloomberg maintains a “dashboard” of key labor-market metrics that depicts the labor market’s current degree of recovery.
What happened to the economy after 2008?
Many conservatives believe that our economy can only thrive if the federal government stays out of the way. Many progressives argue that in our free market system, the government must intervene at times to defend the public welfare and ensure broad-based economic growth. Today’s politics are defined by this discussion.
Americans of all political stripes should agree, however, that between 2008 and 2010, swift and decisive government action was required to avoid a second Great Depression and to aid our economy’s recovery from the biggest recession since the 1930s. After all, the evidence shows that between 2008 and 2010, three acts of Congress signed by two presidents led to the conclusion of the Great Recession of 20072009 and the ensuing economic recovery. Specifically:
- The Troubled Asset Relief Program (TARP) of 2008 saved our financial system from near-certain collapse, sparing the United States’ financial system from tragedy.
- The American Recovery and Reinvestment Act of 2009 averted a second Great Depression and ushered in a new era of economic development.
- By lowering the payroll tax and extending prolonged unemployment insurance benefits, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 bolstered the economy’s fragile recovery.
The top ten reasons why these three major government interventions in the economy were effective will be discussed in this column. But first, let’s go through why such government intervention was required in the first place.
Do you recall the circumstances in 2008? Our economy, job market, and Wall Street were all on the verge of collapsing. Between then and today, there was a strong economic contraction accompanied by large job losses and steep stock market losses, which was followed by slow, uneven, but nonetheless steady economic growth and labor and financial market recoveries. Federal government actions played a significant role in ensuring that the deep dive was not prolonged and that the recovery occurred sooner than it would have otherwise. The job market, the economy, and the financial markets are all showing signs of improvement. This is a tremendous improvement over the condition in 2008.
The Troubled Asset Relief Program of 2008, the American Recovery and Reinvestment Act of 2009, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 all contributed to the United States’ economic recovery. These three moves happened at a critical juncture in the economy’s development, when the economy was on the verge of significant damage unless policymakers took decisive, targeted, and swift action.
The Troubled Asset Relief Program (TARP) was established in October 2008 to allow the federal government to utilize $700 billion to help the banking system recover. During the last months of 2008, much of that money was spent infusing capital into failing banks, ensuring that our financial system would not collapse. In February 2009, the American Recovery and Reinvestment Act was signed into law, enacting a package of tax cuts and expenditure initiatives totaling $787 billion that would last almost two years, through the end of 2010. The Recovery Act provided additional unemployment insurance and Social Security benefits almost immediately, but infrastructure funding did not begin until the summer of 2009. As the Recovery Act’s benefits expired in December 2010, Congress enacted fresh payroll tax cuts and provided extended unemployment insurance benefits.
The result: After each measure was passed, financial markets, the economy, and the labor market began to improve fast, and money began to flow into critical ailing markets. These three policy measures did exactly what they were supposed to do: policymakers intervened to prevent the economy from deteriorating.
To be true, if these policy initiatives had provided more bang for their money, they would have been more effective and efficient. More assistance for distressed homeowners may have been included in the Troubled Asset Relief Program. More infrastructure money might have been included in the Recovery Act, and payroll tax cuts and prolonged unemployment insurance benefits should have been separated from needless tax cuts for the wealthy. However, conservative hostility to more effective and efficient policy interventions made none of this additional assistance for our economy and workers conceivable.
Nonetheless, the Troubled Asset Relief Program averted the financial system’s collapse. While there are reasonable concerns about the program’s design, whether the benefits were distributed equally, and if the monies were spent as efficiently as possible in the long term, there’s little doubt that it benefited the economy. A new Great Depression was averted thanks to the Recovery Act. The payroll tax cuts and prolonged unemployment insurance benefits are still helping to boost the economy today.
Starting with the Troubled Asset Relief Program, the Recovery Act, and the most recent payroll tax cuts and extended unemployment insurance benefits, here’s a review of the 10 ways recent economic and financial data prove that each of these three policy initiatives succeeded as intended.
Loan tightening eased with the introduction of the Troubled Asset Relief Program
In the fourth quarter of 2008, a net high of 83.6 percent of senior loan officers said they were tightening lending conditions for commercial and industrial loans, up from 19.2 percent in the fourth quarter of 2007. Throughout 2009, this ratio decreased steadily. The senior loan officer ratio is an oblique but informative indicator of how simple or difficult it is for firms and individuals to obtain a bank loan.
Similarly, in the fourth quarter of 2008, a net 69.2 percent of senior loan officers said they were tightening prime mortgage criteria, up from 40.8 percent in December 2007, before declining to 24.1 percent in the fourth quarter of 2009. After the Troubled Asset Relief Program stabilized the US financial sector, banks began to relax lending criteria. Following TARP, the business and mortgage credit markets became less tight.
Interest rates ease shortly after the Troubled Asset Relief Program is enacted
The risk premium, or the difference between the interest rate on risk-free U.S. Treasury bonds and the interest rate on mortgages, peaked at 2.2 percent in December 2010, up from 1.5 percent when the Great Recession began in December 2007. After money from the Troubled Asset Relief Program came into credit markets, the gap narrowed to 1.6 percent by January 2009. During normal economic times, this risk premium is normally approximately 1%.
Corporate bond risk premiums rose from 0.9 percent in December 2007 to 1.9 percent in December 2008, before decreasing to 1.6 percent in January 2009. The risk premium rose at first as lenders became concerned about the health of other banks, then declined as the Troubled Asset Relief Program stepped in to help struggling institutions. Because the program’s effectiveness reduced financial market risk, homeowners and businesses had to pay less for their loans.
The specter for deflation disappeared after the passage of the Troubled Asset Relief Program and the Recovery Act
Falling inflationary expectations have the potential to lead to deflation, or a downward spiral in prices. Deflation exacerbates a recession by causing firms and consumers to postpone big purchases in the hope of lower costs. In the fall of 2008 and winter of 2009, the United States’ economy was threatened by deflation; however, the adoption of the Troubled Asset Relief Program and the Recovery Act put people’s minds at ease.
Based on the difference between inflation-protected and noninflation-protected U.S. Treasury bonds, the predicted inflation rate for the next five years was -0.24 percent in December 2008, down from 2.2 percent in December 2007, indicating that deflation was a real concern among investors. The difference between Treasury Inflation Protected Securities and Treasury bonds of the same maturity is what determines the predicted inflation rate for that particular maturityin this case, five years. By May 2009, inflation predictions had surpassed 1% once more, and by December 2009, they had risen to 1.9 percent. Expected price rises of roughly 2% will encourage businesses to invest more and consumers to spend more than they would otherwise, while lesser price increases will cause them to hold off on their purchases.
Economic growth prospects brightened with the passage of the Recovery Act
Expectations for future economic growth are important for actual growth because businesses will invest more, banks will lend more, and consumers would spend more than they would otherwise if they believe the economy will improve more quickly. The nonpartisan Congressional Budget Office raised its growth forecasts for 2010the first full year following the Recovery Act’s enactmentfrom 1.5 percent to 2.9 percent in March 2009. And, sure enough, economic activity accelerated.
Three of the four quarters of 2008 saw the economy contract, and annual inflation-adjusted GDP growth in the first quarter of 2009 was -6.7 percent. However, once the Recovery Act was signed into law in the second quarter of 2009, our GDP only shrank by 0.7 percent in that quarter as government spending increased. The economy then increased by 1.7 percent and 3.8 percent in the third and fourth quarters of 2009, owing in large part to the tax cuts and expenditure measures approved under the Recovery Act starting to trickle into people’s and businesses’ pockets.
Job losses quickly abated due to Recovery Act spending
Job losses fell by 82.3 percent in the final three months of 2009, from an average of 780,000 per month in the first three months of 2009, when the law was passed, to 138,000 per month in the final three months of 2009. During the same time period, employment losses in the private sector fell by 83.2 percent, from 784,000 to 131,000 on average. The first quarter of 2009 was a clear turning point in the labor market, with the steepest employment losses of the Great Recession.
Personal disposable incomes started to rise again with help from the Recovery Act
People lost jobs in droves from the middle of 2008 to the first quarter of 2009, resulting in a drop in personal disposable after-tax income. Higher unemployment insurance benefits, bigger Social Security payments, and lower personal taxes, all of which were part of the Recovery Act, boosted personal disposable earnings in the second quarter of 2009. This provided immediate assistance to families in need.
Families ended up with more money in their pockets as a result of the new law’s immediate expenditure, despite job losses continuing at the same time. However, other Recovery Act provisions that took a bit longer to promote consumer spending aided in improving employment prospects by putting more money in people’s pockets.
Industrial production turned around with infrastructure spending spurred by the Recovery Act
From December 2007 to June 2009, industrial productionthe output of manufacturing and utilitiesdeclined steadily. When infrastructure expenditure from the Recovery Act began to pour into the economy in July 2009, industrial production began to grow again. After six months of sustained growth, industrial production was 3.7 percent higher in December 2009 than in June 2009.
After-tax income grew more quickly following the payroll tax cut
In the first quarter of 2011, when the payroll tax cut and an extension of extended unemployment insurance benefits were granted, after-tax income increased by 1.3 percent, the quickest rate of growth since the second quarter of 2010. As the labor market continued to add new positions at a modest pace, the payroll tax cut put more money in people’s pockets. The new funds bolstered an economy that was still struggling to establish its feet, assisting in the expansion of jobs.
Job growth accelerated with the payroll tax cut
Indeed, during the first three months of 2011, the labor market added an average of 192,000 jobs each month, up from 154,000 jobs in the previous three months. The payroll tax cut gave a sluggish labor market some more impetus.
Household debt burdens fell more quickly with the payroll tax cut
Households had more money in their pockets, and they used some of it to pay down their crushing debts. In the first quarter of 2011, the ratio of total household debt to after-tax income declined 2.5 percentage points, more than twice as fast as in the fourth quarter of 2010 and quicker than in any other quarter of 2010.
These ten reasons why the federal government’s rapid and decisive action changed an impending second Great Depression into the difficult but steady economic recovery we are witnessing today are based on credible economic statistics. There is plenty of room for argument regarding the amount to which the government should be involved in the day-to-day operations of the economy, but there is no reason to doubt why our economy isn’t locked in a long-term depression like to the Great Depression of the 1930s. In this situation, well-intentioned government measures did exactly what they were designed to do.
Endnotes
The net percentage is the difference between the share of loan officers who say lending standards are tightening and the share who say lending standards are loosening. A positive number indicates that more loan officers tightened lending criteria than loosened them, whereas a negative number indicates that more loan officers softened loan standards. The Federal Reserve Board of Governors, Board of Governors of the Federal Reserve System, Board of Governors of the Federal Reserve System, Board of Governor “Senior Loan Officer Opinion Survey on Bank Lending Practices,” Federal Reserve Board Docs, http://www.federalreserve.gov/boarddocs/snloansurvey/201205/fullreport.pdf.
Calculations are based on the following: “http://www.federalreserve.gov/releases/H15/, “H.15 ReleaseSelected Interest Rates.” The interest rates on conventional mortgages are shown below. Bond rates are for corporate bonds with a AAA rating.
The interest rate differential between nominal five-year US Treasury bonds and inflation-indexed five-year Treasury bonds is known as inflation expectations. Similar tendencies can be seen when comparing Treasury bonds of various maturities. Calculations are based on the following: “H.15 Interest RatesSelected Rates.”
New growth data for 2008 and 2009 was added by the Congressional Budget Office, indicating that the recession was worse than previously anticipated. Congressional Budget Office, “Budget and Economic Outlook” (2009); Congressional Budget Office, “A Preliminary Analysis of the President’s Budget and an Update on CBO’s Budget and Economic Outlook” (2009); Congressional Budget Office, “A Preliminary Analysis of the President’s Budget and an Update on CBO’s Budget and Economic Outlook” (2009). (2009). For 2010, the real inflation-adjusted economic growth rate was 3%. National Income and Product Accounts, Bureau of Economic Analysis (Department of Commerce, 2012). The brighter forecast for 2010 helped to offset a recession that was worse than expected. The CBO lowered the 2009 growth rate from -2.2 percent in January to -3 percent in March. However, the CBO forecasted a -1.5 percent growth rate from December 2008 to December 2009 in both January and March 2009. If the economy is predicted to enter a worse recession and then recover more swiftly in 2009, the changes from December to December can stay the same, even if total year growth rates fall. That is, the CBO predicted that the Recovery Act would add quickly to growth in the second half of 2009, offsetting a higher forecast fall in the first half. However, there are no quarterly growth predictions provided.
National Income and Product Accounts of the Bureau of Economic Analysis were used to compile this data.
Calculations based on Current Employment Statistics from the Bureau of Labor Statistics (Department of Labor, 2011). Because monthly job changes are rather unpredictable, the bullet point shows three-month averages. However, monthly job changes follow the same pattern as quarterly averages.
Calculations based on Current Employment Statistics from the Bureau of Labor Statistics.
Lower taxes and other forms of social spending had a greater impact on rising personal disposable incomes in the second quarter of 2009 than in the following quarters. In the following quarters, neither taxes nor other forms of social spending decreased. Instead, taxes remained low, and social spending remained high, with the exception of Social Security, health care, and unemployment insurance. Throughout the rest of 2009, as more people retired and claimed unemployment insurance benefits, Social Security and unemployment insurance payouts grew. Calculations based on National Income and Product Accounts from the Bureau of Economic Analysis.
Calculations are based on the following: “http://www.federalreserve.gov/releases/g17/default.htm, “Industrial Production and Capacity Utilization G-17.”
Calculations based on National Income and Product Accounts from the Bureau of Economic Analysis.
What was it that spared the United States from the Great Depression?
- The Great Crisis was a ten-year global economic depression that began in 1929 and ended in 1933.
- Although no single explanation exists for why the Great Depression occurred, most theories point to the gold standard and the Federal Reserve’s ineffective response as major factors.
- The New Deal and World War II worked together to pull the United States out of the Great Depression.
When did we get back on our feet after the Great Recession?
The Great Recession was the greatest significant macroeconomic shock to the US economy in generations prior to 2020. Millions of people have lost their jobs and houses. At its peak, one out of every ten workers looking for work was unable to find one. The economy shrank more than it had since the Great Depression on an annual basis. Following the formal end of the Great Recession in the summer of 2009, a gradual and steady recovery ensued, but because it was delayed and the depth of the recession was so great, it took years to remove slack in labor markets. However, because the recovery was slow and steady, many pre-recession peaks were eclipsed, and real wage growth ultimately began to accumulate for employees across the distribution. In fact, the business cycle (including recession and recovery) that began in December 2007 was one of the best in many decades for real wage growth, with the bulk of it occurring in the recovery’s last years. We examine the Great Recession’s historical context and the recovery’s several phases, as well as how different types of workers were affected in each phase. We also address fiscal and monetary policy responses to the Great Recession, as well as lessons learned for the future.
Why did the economy collapse in 2008?
Years of ultra-low interest rates and lax lending rules drove a home price bubble in the United States and internationally, sowing the seeds of the financial crisis. It began with with intentions, as it always does.
Why did the Great Recession take so long to recover from?
Some of it is due to the labor market’s long-term sluggishness. During this recession, the percentage of unemployed people who have been out of work for more than six months rose to 45 percent, up from a postwar high of 25 percent.
How did we get back on our feet after the Great Depression?
A frequent misconception is that World War II’s massive spending ended the Great Depression. However, World War II entrenched the steep drop in living standards brought on by the Great Depression. Contrary to the interpretation of Keynesian so-called economists, the Depression was actually ended, and prosperity was restored, by sharp reductions in expenditure, taxation, and regulation at the close of World War II.
True, at the commencement of World War II, unemployment was on the decline.
However, sending millions of young American men to fight and die in the war left a statistical imprint.
As demonstrated after the war, there are better approaches to minimize unemployment.